Wednesday, September 24, 2014

Thomas and the magic Capital

We suppose that much of the intellectual confusion apparent in Thomas Piketty's self-defense at EconTalk could be because he's forced to speak in a language in which he's not completely fluent--with which situation we can sympathize. Still, that confusion seems to be more than a language barrier. Consider what one of the commenters had to say;
I don't intuitively see how we go from rate of return on capital being greater than the overall economic growth rate to a pervasive concentration of wealth.
Oddly enough, Piketty concedes this point when he tells Russ Roberts, at about 16:00, that;
So, r is the rate of return on capital, which is what is the return that you get in one year on your capital investment. .... The growth rate of the economy is a completely different concept.
However that doesn't stop him from comparing them as if they WERE the same thing. But eventually Piketty switches to a different argument (about 32:00);
So, according to the data we have from Forbes's global wealth ranking...
Our bold. Note that Piketty is now talking not about income (return on investment), but wealth.
...these very top groups have been rising at 6-7% per year for that period. Now, world GDP has been rising at 3, 3.2% per year over the period.
He's switched back to comparing growth of wealth of the 'very top groups' to GDP growth--most of which will be consumed.
So if you take per capita income at the world level and per capita wealth at the world level...
We pause to let that conflation of two different things sink in, before we have Piketty saying;
... it has been rising at 1.5-2% per year.
So in other words your top is rising 3 to 4 times faster than the average.
Income, or wealth? Regardless of which he's talking about, he sees that what he claims to fear will be self-correcting;
Now of course this cannot continue forever. And I'm not saying this will continue forever. You can see that if it was to continue forever--if the top was to rise 3 to 4 times faster than the size of the world economy forever, then 30 years from now you will have close to 100% of world wealth belongs to a little group of billionaires.
Which is clearly impossible, since capitalists will need labor to man their factories, sit on their forklifts, operate their drill presses, enter data into their computers....
So, what's he worried about?

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